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Friday, 26 August 2016

Dollar wavers, poised for weekly gains ahead of Yellen speech

The dollar remained on tenterhooks on Friday, on track for a modest weekly rise ahead of Federal Reserve Chair Janet Yellen's eagerly awaited speech that some believe could provide clarity on whether U.S. interest rates will rise this year.

The dollar index, which gauges the greenback against a basket of six major counterparts, edged down 0.1 percent to 94.718 .DXY, on track for a modest gain of 0.2 percent for the week.

Later on Friday, Yellen will deliver the keynote speech at a global central bank gathering in Jackson Hole, Wyoming. She could send a clear signal that the Fed is gearing up for a hike this year, though many analysts believe she will stick to her less concrete stance that monetary policy is data-dependent and a hike is possible.

"The anticipation is a bit too much. She is one of the more pragmatic and balanced speakers," said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management in Portland, Oregon.

"I think she will leave the door open for a rate hike sometime this year, but I don't see the Fed actually moving until December," she said.

Regional Fed presidents have pushed a hawkish message in recent weeks, which Vail said showed they were "trying to get the market expectations close to where the Fed is headed, so when they do execute, it's not a shock to the rates market."

Kansas City Fed President Esther George said on Thursday that it is time for the Fed to raise U.S. rates gradually, given progress on employment and inflation.

"The issue of overheating of the economy is being discussed within the Fed board," Fed Vice Chair Stanley Fischer told a room of labor activists who met with Fed officials to press them not to raise interest rates.

"Everything that's being argued here is being argued in the board as well," said Fischer.

Data overnight reinforced recent upbeat assessments of the U.S. economy. New orders for U.S. manufactured capital goods rose for a second straight month in July as demand for machinery and a range of other products picked up, while the number of Americans filing for unemployment benefits unexpectedly dropped.

After the release of the U.S. data, futures markets were indicating a 24 percent chance the Fed will hike rates at its policy meeting next month and a roughly 57 percent chance of an increase in December, according to the CME Group's FedWatch.

The dollar inched down 0.1 percent against the yen at 100.46 yen, and was flat against the euro at $1.1290 EUR=. It was on track for a 0.2 percent rise against the former and a 0.3 percent dip against the latter for the week, with major currency pairs largely rangebound ahead of Yellen's speech.

"The market may react to one word, or one phrase, but I don't think her speech will bring a new dollar/yen trend," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

"If Yellen shows less confidence about the U.S. economy, maybe people would like to buy the yen more, but I also think there are longterm investors who step in to buy dollars whenever it falls below 100 yen, so I think it will stay around current levels for a while," Murata said.

Japanese data released early on Friday added to evidence that the Bank of Japan has reason to increase its stimulus next month, as the economy slips back toward deflation.

Japan's core consumer prices fell for a fifth straight month and marked the biggest annual drop in more than three years in July, government data showed on Friday, keeping the central bank under pressure to expand an already massive stimulus program.

At its last meeting in July, the BOJ disappointed some investors by refraining from increasing its Japanese government bond purchases even as the government gears up to issue more debt to fund its latest stimulus drive.

The disappointment pushed JGB yields sharply higher, and underpinned the yen. Some analysts say the Japanese currency could be in for a bout of volatility and may even strengthen further in September, building on its recent boost from the rise in JGB yields.